What Is SEC Regulation D (Reg D)?

What Is SEC Regulation D (Reg D)?

Let me explain Regulation D, or Reg D, which is a Securities and Exchange Commission regulation that governs private placement exemptions. Don't mix it up with the Federal Reserve Board's Regulation D that caps withdrawals from savings accounts.

If you're running a private company or you're an entrepreneur who qualifies, Reg D offerings can be a real advantage because you can secure funding quicker and at a lower cost compared to going public. This is typically how smaller companies do it. The rule lets you raise capital by selling equity or debt securities without registering them with the SEC, though you'll still have to deal with various state and federal requirements.

Key Takeaways

Regulation D enables companies in certain private placements to raise capital without SEC registration of the securities. Remember, SEC Reg D is distinct from the Federal Reserve's version that restricts savings account withdrawals. You, as the company or entrepreneur, need to file a Form D disclosure with the SEC after selling the first securities. And anyone selling under Reg D must follow all relevant laws.

Understanding SEC Regulation D (Reg D)

When you raise capital via a Reg D investment, the requirements are far less burdensome than for a public offering, so you can save time and potentially issue securities that might not fly otherwise.

It's important to note that while Reg D simplifies fundraising, buyers get the same legal protections as other investors. These aren't secret deals either; depending on the rules you apply, you can openly solicit potential investors in your network.

Requirements of SEC Regulation D

Even if your Reg D transaction involves just a couple of investors, you still need to set up the proper framework and provide disclosure documents. File Form D electronically with the SEC after the first securities sale. This form is much lighter than public offering docs—it just needs names and addresses of executives and directors, plus some basic offering details.

You must also disclose any prior 'bad actor' events, like criminal convictions, before the sale to avoid companies dodging accountability for shady employees. Per the Federal Register, Reg D transactions aren't exempt from antifraud rules, civil liability, or other federal securities laws. Plus, you have to comply with state laws on securities offers and sales, which might require filing notices of sale and naming compensated individuals.

Exemptions Established By Regulation D

Under SEC Regulation D, there are three key rules for private offering exemptions.

Rule 504

Rule 504 lets you sell up to $10 million in securities over 12 months without registration. File Form D within 15 days of the first sale and comply with state regs where you're offering or selling. But not all companies qualify—investment companies, Exchange Act reporters, those without a business plan, merger planners with unidentified targets, or 'bad actor' disqualified firms are out.

Rule 505

The SEC phased out Rule 505 in 2016, folding much of it into Rule 504. Before that, it allowed sales up to $5 million in 12 months to unlimited accredited investors and up to 35 non-accredited ones.

Rule 506

If you qualify under Rule 506, you can raise unlimited capital. Be ready to answer buyer questions, and note that buyers get restricted securities. Like old Rule 505, Rule 506(b) allows sales to unlimited accredited investors and up to 35 non-accredited, but those non-accredited must be 'sophisticated' with enough background to assess risks and rewards.

For accredited investors, you decide what info to disclose. But for non-accredited, you follow stricter rules, including sharing financial statements.

Accredited Investor Exemption

The Securities Act of 1933 permits unregistered sales to accredited investors if the offering is under $5 million, but Regulation D doesn't cover these private offerings directly.

Limitations of SEC Regulation D

Reg D benefits are only for the issuer, not affiliates or resellers. The exemptions apply to transactions, not the securities themselves.

What Is the Goal of Regulation D?

The goal is to let smaller companies access capital markets without the cost of a registered public offering. Its provisions protect investors by ensuring companies meet exemption requirements and aren't fraudulent.

What Is An Accredited Investor?

Accredited investors are individuals or entities allowed to trade unregistered securities if they meet financial benchmarks like a $1 million net worth, $200,000 annual income ($300,000 if married) for the last two years, or certain professional criteria.

How Is Regulation A Different From Regulation D?

Regulation A also lets smaller companies sell securities publicly with reduced reporting, but unlike Reg D, which mostly requires accredited investors, Reg A allows non-accredited ones with investment limits.

The Bottom Line

Regulation D exempts some companies from public offering registration, giving smaller firms access to capital through private placements. Its rules set limits on amounts and investor types, especially for non-accredited investors, and you must still follow state securities laws.